Ingves: The international regulation agenda – necessary but not enough
The regulatory frameworks that are now being finalised internationally and introduced in Sweden and abroad will increase the safety margins in the financial system. The Basel III framework, in particular, will reduce just those risks and problems that Swedish authorities have identified in the Swedish banks. Nevertheless, in Sweden's case the measures are not enough. This was pointed out by Stefan Ingves today when he spoke at Affärsvärldens Bank & Finans Outlook at Berns in Stockholm.
As chairman of the Basel Committee, he has a large responsibility for finalising the Basel III regulatory framework that is that part of the international reform agenda that followed in the wake of the crisis and that affects banks all over the world.
Although the Basel III framework provides a solid foundation, it only comprises minimum requirements that are not able to manage all the risks in the Swedish financial system. According to Mr Ingves, there are specific circumstances in Sweden, special structural vulnerabilities, that more than justify continuing to set stricter requirements for the Swedish banks.
Mr Ingves pointed out several areas where, in his view, it was particularly important for Sweden to take action sooner and have stricter regulations.
- The major Swedish banks should have more capital than required by Basel III and the Riksbank, together with Finansinspektionen and the Ministry of Finance, has therefore recommended that from 1 January next year the major Swedish banks should have Core Equity Tier 1 capital ratios of at least 12 per cent.
- Mr Ingves also took up the so-called countercyclical buffer, which is one of the new buffers introduced through the capital adequacy regulations in Basel III. He said that against the background of developments in Sweden it is reasonable that the countercyclical capital buffer is implemented once the regulations for the buffer are in place, and that it is activated at a high level. This will further increase the resilience of the banks.
- The banks also need to hold larger liquidity buffers in the currencies in which they have their largest cash flows. The requirement in Sweden at present is that the largest institutions should have a liquidity coverage ratio of at least 100 per cent. This requirement applies generally to all currencies and for euros and US dollars separately. It is also reasonable that the banks report their LCRs in Swedish kronor to provide a more complete picture of their liquidity risks. According to Mr Ingves, there are good reasons for introducing some form of quantitative requirement for LCRs in Swedish kronor in order to reduce the risks.
- A sufficiently high floor for risk weights for Swedish mortgages is also needed. At present, there is a risk-weight floor of 15 per cent in Sweden. However, as long as household indebtedness continues to increase there are good reasons for raising this floor.
Mr Ingves also mentioned that in the longer term the Riksbank needs to look more closely at whether Sweden should also have stricter requirements than the upcoming international minimum requirements for the leverage ratio and the Net Stable Funding Ratio.
In conclusion, Mr Ingves noted that the Basel Committee has recently made important progress towards finalising the Basel III regulatory framework. Hopefully, a complete framework will be ready by the end of 2014. This will entail a change in the focus of the Committee's work. Going forward, the emphasis of the Committee's work will increasingly be on monitoring and assessing the application of regulatory frameworks to ensure that this is done effectively.
Read the entire speech: The international regulation agenda – necessary but not enough
